Memorandum submitted by the Food and Drink
Federation
The Food and Drink Federation (FDF) is the voice
of the UK food and drink manufacturing industry. Our industry
is the UK's largest manufacturing sector with an annual gross
output of over £69 billion. FDF has a diverse membership
which includes the UK's two primary sugar processors, four starch
manufacturers and a large number of sugar and sweetener users.
FDF broadly welcomes the Commission's sugar
reform proposals which were tabled on 22 June 2005. We have considered
these carefully and would now like to offer policy-makers some
preliminary comments which are set out below:
1. BASIC POSITIONS
Starch manufacturers[1]
would like production quotas to be abolished. If they are to remain,
manufacturers would like to see a significant expansion of the
isoglucose quotas in order to help offset any institutional price
cut for sweeteners and to realise economies of scale.
Sugar processors accept that reform of the EU
sugar regime is inevitable. Processors would like to highlight
the complex and sensitive issues that reform raises and the severe
financial impact the proposal would have. Tate and Lyle welcomes
attempts to ensure some measure of equity and security in the
supply of raws, but believes the proposed cut to its refining
margin is disproportionate and its exclusion from the private
storage system and the lack of a facility to lower its raw material
price is discriminatory. British Sugar welcomes plans to introduce
a voluntary restructuring scheme for the industry, but is concerned
that the proposed price cuts go too far and that the proposal
is lacking on the external trade side.
Sugar users would like to see production quotas
abolished and a market price develop for sugar and sweeteners.
They are concerned that the proposal does not contain any mechanisms
to ensure that there is real competition between EU sugar processors,
or that the domestic "market price" for sugar will be
driven by the "reference price".
The comments below should be considered in the
light of these overarching positions.
2. GENERAL COMMENTS
FDF members are concerned by the vagueness of
the reform proposals and the power that they confer upon the Commission
and the Sugar Management Committee. We appreciate the desire to
reduce complexity in the Council regulation but believe that this
has been taken too far. Further elaboration of the proposals,
and notably of the new tools which the Commission plans to introduce,
is urgently needed. The Commission should also produce full details
of how it plans to exercise its powers when designing implementing
legislation.
3. TIMING
FDF members appreciate that additional commercial
certainty will be created by extending the life of a new Sugar
Regime until 2014-15. However, none of our members would like
to see the regime as described in this Commission proposal, lasting
until 2014-15. We accept that it may be unwise to provide for
a full scale mid-term review of the regime. However, many of our
members believe that a provision to enable occasional "health
checks" should be introduced, especially as a number of the
Commission's proposed mechanisms are new and it is unclear how
effective they will be.
4. PRICES
FDF members are unconvinced that the proposed
reference price system would actually work and are unsure what
real impact it would have on EU market prices, especially as the
number of EU sugar suppliers will contract under the current proposal
and the future of the external sugar tariff remains unknown. FDF
members note that the existing reference price system for pigmeat
does not work as an indicator of internal market prices. Sugar
processors would like to retain the intervention purchasing system
as they are not convinced that the reference price system would
offer an effective floor to the internal market, and as they will
still be required by law to pay minimum prices for raw materials.
If institutional pricing for sugar is to remain, sugar users believe
that the new system must drive actual market prices.
FDF members appreciate that some form of price
reporting system will be necessary to ensure the effectiveness
of the new reference price system and to activate the private
storage scheme and import quota provision. We are concerned however
by the Commission's reluctance to elaborate upon how the system
would work and how the triggers for market intervention would
be set. We note that previous price reporting systems for sugar,
and a number of other commodities, have not worked well in the
past. Lessons must be learnt from these experiences. Price information
is commercially sensitive and its publication may not be the most
effective way to promote a competitive market. Furthermore, sugar
is not a simple bulk commodity and prices vary considerably depending
on quality, service specification, time of the year, contract
duration and other factors. Accurate reporting would require price
figures to be broken down significantly and this may be unhelpful
for both processors and users.
FDF members agree that there is insufficient
information available to judge the merits of the proposed private
storage scheme. However, at first glance the proposal appears
unstable, unrealistic and not helpful to the UK. This scheme is
being proposed as one of three mechanisms to aid with the disposal
of surplus sugar. We expect it will be the Commission's last resort
as it will be required to pay the bill. Tate and Lyle believes
its exclusion from this scheme is discriminatory.
5. QUOTAS
Members agree that it would be a sensible simplification
to merge the A and B production quotas following the abolition
of producer levies as the distinction would no longer be necessary.
Members note that this decision would benefit surplus sugar producing
nations such as France and Germany as their B quotas incorporate
large surpluses.
FDF members note that a number of UK industries
would benefit from the expansion of the isoglucose quotas. Starch
manufacturers are adamant that if production quotas are to remain,
they would need a significant expansion of the isoglucose quotas
in order to help offset any institutional price cut for sweeteners
and to realise economies of scale. Sugar users would like to be
able to source isoglucose according to domestic demand and not
be constrained by quotas. Members note that the current restrictions
prevent users from taking advantage of the functionalities of
isoglucose. British Sugar believes that production quotas on isoglucose
will need to remain so long as there are quota restrictions on
sugar.
FDF members accept that the notion of introducing
quota tradeability is politically contentious. We also appreciate
that the Restructuring Fund and the provision to allow sugar processors
to convert 1 million tonnes of C sugar into quota by purchase,
will help the European industry to restructure. Despite this,
we still believe that quota tradeability should be introduced
to enable the industry to restructure more effectively.
Members acknowledge that by excluding sugar
for the chemical, pharmaceutical and bioethanol industries from
production quotas, the EU will create an outlet for non-quota
sugar. Starch manufacturers are concerned however that this provision
will put their products at a competitive disadvantage compared
with sugar when selling into these industries.
6. RESTRUCTURING
SCHEME
FDF members agree that efforts to assist in
the restructuring of the EU sugar industry will be necessary,
both for political and economic reasons. However, members are
divided in their views on the proposed voluntary restructuring
scheme. Sugar processors are in favour of it. Sugar users are
concerned that it may inadvertently encourage some of the EU's
more efficient processors to exit the market. They are also worried
that it may lead to further industry consolidation and a reduction
of competition on the domestic market. Users also object to the
fact that they will effectively have to fund this restructuring
scheme.
Starch manufacturers believe they are effectively
being asked to pay a higher digressive restructuring levy than
sugar processors in the Commission proposal. In their view, sugar
processors will be able to recoup 58% of the levy from beet growers
as a result of price cuts, whereas starch manufacturers will have
to fund 100% of the levy themselves. They believe that both groups
should pay the same effective levy rate taking into account each
sector's raw material costs.
7. FARMER COMPENSATION
FDF members acknowledge that politically, farmers
will need to be compensated for the income loss arising from Sugar
Regime reform. We accept the proposal to compensate for 60% of
the price cut, to pay this compensation via the Single Farm Payment
and for the payment to be fully decoupled, so long as every member
state is subject to the same conditions.
We agree that sugar beet should qualify for
set-aside payments when it is grown as a non-food crop and we
believe that this production should also be eligible for the energy
crop aid for
45/hectare.
8. OUT OF
QUOTA PRODUCTION
British Sugar would not support the introduction
of a "super levy" to dissuade producers of sugar from
exceeding their production quotas. Sugar beet yields are highly
variable and unlike dairy farmers, sugar beet growers are not
so easily able to control their yields in order to avoid paying
this levy. Tate and Lyle, sugar users and starch manufacturers
would support the introduction of a "super levy" given
the lack of export flexibility that will be available in the future.
Sugar processors and users support the proposal
to enable processors to purchase part of an additional one million
tonnes of quota for a one-off payment. However, sugar processors
believe the proposed price of this quota—
730/t—is unreasonably high. Starch manufacturers
are astonished that the Commission has proposed to increase the
EU sugar quota by one million tonnes, whereas the proposed increases
in the isoglucose quotas are minimal.
9. MARKET MANAGEMENT
British Sugar believes that it would be sensible
to start the sugar marketing year on 1 October, instead of 1 July,
as this would complement the annual sugar beet production cycle.
Sugar users and starch manufacturers could accept this suggestion
so long as they would not be required to pay the restructuring
levy or a higher price for sugar for an additional three months
during the implementation of a new sugar regime. Furthermore,
sugar and isoglucose producers only wish to pay the levy on actual
production and not production quotas. Tate and Lyle questions
how this would relate to the refiners' supply, the terms of the
Sugar Protocol and a potential phasing-in of the arrangements
for the cane suppliers which have different crop and delivery
cycles.
10. TRADE WITH
THIRD COUNTRIES
Sugar users welcome the Commission's proposal
to open-up the EU market to additional supplies from third countries
if and when the EU sugar price becomes substantially inflated.
They believe this mechanism will be essential to ensure the EU
market price for sugar falls and that the UK food industry does
not become uncompetitive on the world market. Sugar processors
are concerned about this proposal however, given the perceived
lack of an effective institutional mechanism to put a floor to
the EU market and the risk of an over-supply emerging.
11. PREFERENTIAL
SUGAR IMPORTS
FDF members note that the Commission communication
is sugar beet focused and that the EU's development commitments
to sugar producers in African, Caribbean and Pacific (ACP) countries
and Least Developed Countries' (LDC) have not been well thought
through.
We note the proposal to provide ACP countries
with
40 million of restructuring aid in 2006. We are not
in a position to know whether this will be sufficient and we do
not believe that the Impact Assessment is robust enough for the
Commission to know either. Expeditious resolution of the debate
over the Financial Perspectives is desirable so that ACP producers
will have the necessary information about the range of accompanying
measures and the finances likely to be available to them in the
short- to medium-term.
FDF members are pleased to see that the EU's
import commitments to the ACP countries and India, the world's
LDCs and the western Balkans will continue. We are also content
for the Traditional Supply Needs mechanism to remain. It will
be essential that there is equitable treatment of existing and
potential cane refiners.
12. PROVISION
FOR EXPORTS
FDF members accept that the EU must abide by
its World Trade Organisation (WTO) export subsidy reduction commitments
and that the EU is committed to eliminating all export subsidies
by a date to be agreed as part of the ongoing WTO talks. We are
opposed to the idea that the Commission may impose linear production
and import quota cuts from 2010 if the EU is in danger of breaching
its WTO commitments. The UK does not contribute to the EU sugar
surplus, and as such, should not be forced to pay for it through
the introduction of a pro-rata system for allocating quota cuts,
ie the declassification key should remain. Starch manufacturers
do not believe that any quota cuts should apply to them as they
do not claim export refunds. Sugar users note than when quotas
have been cut in previous reviews of the Sugar Regime, market
prices have gone up and this is of concern to them.
FDF members welcome the Commission's commitment
to retain Non-Annex One (NA1) export refunds whilst EU sugar prices
remain above "world price" levels. At the moment, NA1
refunds are calculated by adding up the refunds available on a
processed product's raw materials. Under the current system, if
export refunds are eliminated on sugar, the NA1 refunds on the
sugar content of manufactured products for export will also be
zero. Therefore, the Commission will need to devise an alternative
method for calculating NA1 export refund rates in the future.
The Commission will need to ensure that the new calculation is
WTO legal, bearing in mind that Part V, Article 11.1 of the WTO
Agreement on Agriculture states—"In no case may the
per-unit subsidy paid on an incorporated (processed) agricultural
primary product exceed the per-unit export subsidy that would
be payable on exports of the primary product."
sugar processors agree that production refunds
for sugar used in the chemical and pharmaceutical industries should
remain. Starch manufacturers on the other hand, believe that these
refunds should be eliminated as they give sugar processors a competitive
advantage.
13. IMPACT OF
REFORM
FDF members are not at this stage in a position
to critique the Commission's updated Impact Assessment of the
proposed reforms. Our initial impression however, is that it is
superficial and lacing in economic and intellectual rigor. In
many places it is apparent that the figures have been based on
implementation of the Commission's July 2004 White Paper, and
not the current proposal. A robust impact assessment will be necessary
to help inform the decision-making process. Therefore, we recommend
that the Commission should devote the necessary resources to ensure
that a robust document is available.
14. COMPETITION
Any new sugar regime should encourage and enable
greater competition than that which currently exists in the EU
market. Sugar users do not believe that the current proposal will
ensure this.
Food and Drink Federation
August 2005
1 The term starch manufacturers refers to producers
of isoglucose and glucose syrups. Back
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